Legal Alert: Cost of Insurance Litigation – Recent Rulings Diverge on the Scope of Insurer Discretion to Set Rates

by Eversheds Sutherland (US) LLP
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Litigation continues in various cases challenging cost of insurance rates (COI) in life insurance policies, and January 2013 saw courts issue decisions going both ways on insurer discretion to set and modify COI rates. A federal district court in California held that changes to COI rates cannot be “wholly divorced” from changes in mortality experience. In Wisconsin, a federal district court held that an insurer had broad discretion to set COI rates regardless of the factors considered, as long as the rates did not exceed the guaranteed maximum rates. And an Indiana state trial court has denied a motion to dismiss in a COI case, holding that the COI provision was ambiguous and should be interpreted in favor of the insured.

This Legal Alert discusses these decisions and also reports on other ongoing developments in litigation challenging COI charges. The complaints in the COI cases generally allege that COI rates must be based solely on mortality factors, as defined by plaintiffs (e.g., age, sex, underwriting class), and cannot be increased or set based on other non-mortality factors. These three recent rulings continue a trend of mixed decisions on COI issues.

A California Federal Court Holds That COI Increases Cannot Be Divorced From Mortality Experience

On January 29, 2013, a federal district court in California denied the insurer’s motion for summary judgment and partially granted the plaintiffs’ cross motion in ongoing multidistrict litigation challenging COI rate increases. In re Conseco Life Insurance Company LifeTrend Insurance Sales and Marketing Litigation MDL, No. 3:10-md-2124 (N.D. Cal Jan. 29, 2013) (Please click here for the opinion.) The court also denied the insurer’s motion to decertify the class. The plaintiffs alleged the insurer improperly sought to increase COI rates based on factors other than mortality, including for the purpose of recouping past losses. The court certified a national class on October 6, 2010 (which was later partially decertified as to former policyholders), and on July 17, 2012, entered a preliminary injunction enjoining COI increases against certain policyholders pending final resolution. In entering a preliminary injunction, the court held that changes to COI rates were contractually tied to changes in mortality rates and that the plaintiffs were therefore likely to prevail on the merits of their breach of contract claim.

Please see full alert below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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